Can Populist Governments Inevitably Crash the Economic System?

“Exchange, exchange.” Under the scorching heat, dozens of currency traders are selling US dollars on Florida Street, a bustling shopping street in Buenos Aires. Known as arbolitos (“small trees”), they are thriving before the 26 October congressional elections in a nation long used to holding the greenback.

“The best time for purchasing is now,” says a arbolito, refusing to provide her identity. “[The dollar] dropped a little but it’s deceptive – it’ll rise again.”

Like her, economic experts across the spectrum anticipate a depreciation of the national currency after the election is over. President Javier Milei has imposed a limit on the currency to control triple-digit inflation and now it remains overvalued and foreign reserves are exhausted, causing the national economy sluggish as consumers turn to low-cost foreign goods.

Fertile Ground

The nation is a very special case. Argentina has frequently been racked by sovereign defaults and economic crises and the electorate have been susceptible for decades to leftwing populism, in the form of the influential Peronism, and currently Milei’s conservative populism.

Milei epitomizes populist leadership: captivating, unconventional, promising muscular measures to reclaim control of the economy from traditional elites on behalf of ordinary citizens.

These key characteristics are also seen in his ally to the north, and by the UK politician, who presents himself as a pint-swilling people’s champion even though he is a public school-educated former stockbroker.

Until recent months, the president’s strategy – including extensive privatisations and deep public spending cuts – had won plaudits from international lenders for contributing to bring price rises under control. This plan shares similarities with that of Milei’s idol Margaret Thatcher, who similarly viewed rising prices as a monster to be defeated, no matter the cost.

But investors began losing confidence in Milei’s radical project lately following a shaky result in local polls and multiple corruption scandals. Only large-scale economic support from abroad has prevented what looked set to become a major currency crisis.

Inconsistencies

The vote for Brexit several years ago likely contained similar reasoning, and its figurehead, the former prime minister, swept away doubts regarding fiscal impacts with a bullish determination to enact public demand in the face of the establishment’s horror.

The Reform leader has so far outlined limited plans in writing aside from a call for large-scale removals, which he subsequently appeared to revise on the hoof. He wants to curb the Bank of England, possibly replacing its head, Andrew Bailey, with scepticism toward traditional institutions being a key part of the populist package.

His tax and spending policies seem unsettled: wary of being accused of proposing a Liz Truss-style splurge, he lately dropped a pledge for significant tax cuts. His second-in-command, the party chairman, said they would concentrate instead on public spending cuts.

Labour aims this stance will allow it to portray the populist as planning to bring back austerity – an argument Rachel Reeves has made repeatedly, comparing it unfavorably to her approach of boosting government spending.

An economics professor notes there are contradictions in Farage’s economic programme, as it stands. “The party is funded by affluent backers calling for lower taxes and deregulation, yet also emphasizing the grievances of working people and the loss of industrial jobs,” he explains. “There is a conflict there among wealthy supporters who want Thatcherism on steroids, and this narrative of bringing back UK employment and industrial revival.”

Holding on to Power

Realistically, research suggests populists of any stripe often perform poorly when confronting practical difficulties (though of course every populist leader promises something unique).

A recent paper from a leading journal examined the performance of dozens of populist leaders, over more than a century. It found that on average, over the long term, gross domestic product per head is often 10% lower in countries governed by populist leaders compared to comparable countries under conventional leadership.

“Economic disintegration, weakening economic fundamentals and the decay of governance typically occur together with populist rule,” argue the researchers.

A further interesting result from the study, though, is that even with their negative impacts, these leaders tend to be good at holding on to power, lasting on average a considerable time, versus four for mainstream politicians.

Put simply, it is not clear whether even if their policies fail, populists immediately pay the price at the ballot box. Like the Brexiters’ promise to regain sovereignty, their attraction extends past mundane economics.

But returning to Buenos Aires, whether the government’s agenda collapses or is sustained by external aid, the Argentine people are already bearing a heavy price.